Archive for February, 2011

Fisher Investments Analyst’s Book Review: Do as I Say, Not as I Do, Part 3

February 28, 2011 Leave a comment


But regarding these books, there’s another rub that if not treated preventatively can turn into a rash: Asset allocation.

Swensen’s Yale and other endowments (for the reasons listed above) can invest in non-liquid assets with a higher expected return than stocks because, again, they run no-time-horizon endowments. So for them, diversification into those things can actually smooth their returns over time—and potentially even raise their expected return. Gonzo!

But for regular folks, again, this can’t work. Forget the fact most folks already have most of their net worth in residential real estate (and we’re seeing just how illiquid that can be right now!). If liquidity is a virtue, then you can’t buy tons of those non-liquid things. And of the available highly liquid categories (stocks/bonds/cash), stocks are by far and away superior—they have a higher expected return (and thus are also more volatile).

This is all to say that Modern Portfolio Theory, genius as it is, has been contorted and perverted by the industry in many ways over the years. Among the liquid asset classes, anything other than stocks by definition lowers expected return because bonds and cash won’t return as much over time with the exception of very rare periods. You might be smoothing out returns by diversifying, but you’re also lowering what you can potentially get in return. Period.

Diversification was originally intended to be a way to maximize expected return within an asset class—not the mixing of them; different rules apply when you do that. One of the many conceits sold to most investors to diversify asset classes is that because of behavioral errors humans are prone to, you should diversify away from, say, stocks, because you’re still a chimp at heart, and you’ll panic and sell at the lows and buy at the highs. So you need something to smooth it out—you’ve got a low pain threshold for all the ups and downs of stocks.

I don’t believe this is good medicine. It’s a case of the tail wagging the dog. A good doctor (portfolio manager) understands these lessons—these basic disciplines of investing—and earns his pay by not making those classic behavioral mistakes. In fact, the express purpose in my view of a great money manager is to make fewer mistakes over the long run than you would. Investing’s ultimately a discipline. That concept alone can create more wealth for folks than any genius stock pick.

It’s unconventional to say as much, but you do NOT have to allow your human-error prone nature to dictate a lower expected return for yourself. Instead, what you need to do is find the right manager. Granted, this is also tough to do, but they exist. Swensen, et. al., admit as much: Active, effective portfolio strategy can be done by excellent professionals, but most professionals and non-professionals will fail.

Don’t try the surgery yourself; find the right doctor.  That’s my prescription from my desk at Fisher Investments.  Happy Monday.

If you missed parts of this book review, they can be found here:  Do as I Say, Not as I Do, Part I Do as I Say, Not as I Do, Part II

Fisher Investments Analyst’s Book Review: Do as I Say, Not as I Do, Part 2

February 26, 2011 Leave a comment


But Dave Swensen’s Unconventional Success is no half-wit’s prescription. This is a fantastic book for intermediate investors (it’ll be a tad too jargony for total neophytes). There are things to quibble with (mostly tied to how he views asset allocation, more on that in a moment), but for the most part, I can scarcely point to a better book explaining the investment landscape; from pithy and elucidating descriptions of boring product types (deadening boring TIPS), to (mostly) practical views on market timing and rebalancing, to the ills of mutual funds and other misaligned incentives in the industry. Swensen calls his book “unconventional,” and it is, but most of his dictums are intuitive concepts to be found daily on Fisher Investments MarketMinder’s editorial page.

And this is a guy you want to listen to. If you haven’t heard of Swensen, you’re probably not alone. He’s not one of the aforementioned gaga gurus. Though he’s got a few books to his name, he generally stays out of the spotlight. He’s run Yale’s Endowment (one of the largest in the world) for some years now and produced very good returns for them over the years.

Unconventional Success is geared toward the average investor. But one of the things that becomes immediately clear is it takes a tremendous amount of time and intelligence to navigate the investing territory adequately. Swensen moves with acrobatic clarity and lucidity from topic to topic, but goodness gracious, there’s no chance a non-professional could do the same. So the lesson of this book, ironically, is to seek out a good investment doctor.

If you’re a true-to-goodness newbie to investments, read Goldie and Murray ’s Investment Answer instead, which is effectively a distilled and often didactic version of Swensen’s views. Like Swensen, they stress a high degree of discipline and admonish readers to seek help of a fee-based adviser. Good advice, indeed.

It’s tough though to recommend Faber and Richardson ’s Ivy Portfolio. It’s not a bad book per se, but you’re better served going straight to Swensen instead of experiencing a distilled version of him. The book’s virtue is it describes the endowment investing world, which is an interesting subject, but only for a narrow audience.

The supreme irony about all three books is they tell you (mostly) the right things to do…and then proceed to say you can’t do them. It’s “do as I say, not as I do,” because you, as an average retail investor, can’t reasonably do the things Swensen does. This isn’t just a matter of skill—endowments are just different than you. They have no end date, which means they can lock their capital up in stuff like buyout and private equity funds and real estate for decades without worrying much about liquidity.

Regular folks can’t do that. Liquidity is the unsung hero of equity capital markets—we should marvel at the high expected return they provide in addition to lightning-fast liquidation. Most folks need to be able to sell their assets, or at least parts of them, on a fairly regular basis—and it’s still better if you more or less get the actual price that’s quoted to you and quickly. For that, you need stocks, bonds, or cash.

To be continued…

Fisher Investments Analyst’s Book Review: Do as I Say, Not as I Do, Part I

February 25, 2011 Leave a comment

This is the first installment of a 3 part series. Books discussed in this review:

Unconventional Success: A Fundamental Approach to Personal Investment – David F. Swensen

The Investment Answer – Daniel C. Goldie and Gordon S. Murray

The Ivy Portfolio: How to Invest like the Top Endowments and Avoid Bear Markets – Mebane T. Faber and Eric W. Richardson

How Doctors Think – Jerome Groopman, M.D.

Better: A Surgeon’s Notes on Performance and Complications: A Surgeon’s Notes on an Imperfect Science –Atul Gawande


All analogies are imperfect, but to compare investment professionals to doctors is apt. In both cases, customers should consult a professional—self medication is perilous. Except there’s no Hippocratic Oath for investing pros, which means there’s a lot of voodoo advice out there.

If you have a minor ache, you pop an Advil, ask the pharmacist, or just consult WebMD. But if you need major surgery, you need a doctor—and you want the best. And not just the best, you need the best specialist. If you’ve got a brain tumor, you don’t want a cardiologist.

Also, doctors are wrong quite a lot! Even in medicine, situations are contextual and the body sometimes does things against expectations, and there are fewer ironclad rules than we’d like to believe. So the quality of the doctor matters—the best ones are sometimes wrong, but are generally less wrong than the bad ones. You listen to your doctor—even if you think he might be wrong or what he prescribes is counterintuitive. Why? Because you know your doctor has a better chance of being right than you do. Atul Gawande has recently become something of a guru in popular medicine writing. And I’m always delighted to read his books and compare what he does with what professional investors do. (It’s not always the same, of course, but a wonderful analogy nevertheless.)

It’s all the same thing with investments and planning your financial life. It’s absurd for the vast majority of folks to believe they can handle their investments on their own. You need to find a good professional to help you—someone who knows what they’re doing and isn’t just a salesman. If you need stocks, you need to find a stock specialist, and so on. And, yes, just like a great doctor, the reality is the more complex your circumstance and needs, the more that service will cost you. (This won’t be a review about how to pick the best adviser, but I can direct you on how to avoid the legit crooks: Read CEO of Fisher Investments Ken Fisher’s How to Smell a Rat: The Five Signs of Financial Fraud.)

The landscape is littered with investment advice books of the self-medicating variety, particularly, those ultra mass-market guru tomes admonishing you to “revolutionize” or “make over” your money. This is sort of an over-the-counter style of investing—fine enough for some basic tips. But let’s face it, to plan your financial life you need more than an ultra-commercialized set of tautological (and often fairly condescending) tips, like being told to “save more.” Well, duh.

To be continued…

A Great Tradition

February 24, 2011 Leave a comment

David Brooks in the NYT recently wrote about an ebook that’s getting some buzz: The Great Stagnation by Tyler Cowen.

I read it last night and can’t for the life of me tell why it’s gotten any notoriety other than it’s a first entry in the new phenomenon of shorter books (or, perhaps, longer essays) being published as ebooks and sold for a few bucks. This “invention” is being touted by Amazon and others, and is a good thing—most nonfiction books these days are about 40% too long but editors pad them so they seem more substantial. The essay is the right form for most business and economic non-fiction these days. So I applaud Cowen for being a pioneer here.

As for the book itself, it ultimately amounts to another in a long and great tradition of Americans telling each other how we’ve gone wrong as a society/economy. You’ve got to love it: it’s the hallmark of a strong and great people that openly derides itself. But there are oodles of books out there telling us how bad we are right now, and they’re all mostly myopic to the present moment even if they claim not to be. (For instance, Cowen claims we’ve been on a multi-decade run of decline in creating jobs, but forgets that US unemployment was at or near historical lows for most of the last decade.) Reading this book, you’d have no sense that US GDP is already back at inflation adjusted new all-time highs, that global stocks are ~100% off their lows, or that the US is leading the developed world’s growth right now. To Cowen, we’re not innovating, we’re not really productive— Stuff like iPods and smartphones, Facebook and other social media, though they’re catching on like wildfire globally and were created on US soil, are written off as not really useful for society.

With all due respect to Mr. Cowen, the fallacy of this kind of thinking is easy to see when you realize the basic fact that the US is a developed economy—in fact the most developed in the world! It’s not a matter of “eating the low-hanging fruit” anymore—that’s precisely what developed economies are supposed to do, and we did it very well thank you very much. Cowen compares now to times like the 1890s. Why? We’re a service based economy now, still innovating better than basically anywhere. You’re not going to get huge swaths of folks rising precipitously in standard of living brackets because our country is already way high as it is.

Cowen ultimately offers something of an optimistic view about the far-flung future. That’s good, but if you want to see a more optimistic future, I still contend Matt Ridley’s Rational Optimist is second to none. It’s far better to recognize the most recent recession—bad and deep as it was and still with lingering effects (like high unemployment)—was still an example of the cyclical nature of free economies and markets.

At the very least, as I see it, the continued appearance of books like these among the intelligentsia reminds us there’s plenty of pessimism still out there.

Whizz-Bang Futurism Does Nothing for Stocks

February 18, 2011 Leave a comment

The Economist’s piece this week on 3D at home printing and manufacturing is fascinating and just generally awesome to contemplate. Who knows when we get there (which I think we will) what form that’ll actually take. But what a concept!

And there’s the rub. Investors have this tendency to get all giddy about stuff (it’s usually technology, but can be industrial or energy based, like biofuels) that seems great but won’t actually benefit earnings for companies in any significant way for years or maybe even decades.

Which means, thinking such high concepts as investment opportunities is perilous stuff. Part of the discipline of investing includes being able to differentiate cool ideas from those that will bolster bottom lines in the here and now or very soon. Don’t let your imagination get away from you. Very often, what works best is the boring, staid stuff that really drives how the world works—heavy industrials, rails, shippers, parts manufactures, and so on. Those don’t get a lot of ink in Fortune magazine, but they matter a lot, don’t forget them.

On a separate note, congrats to the greatest living pop rock musician/technician/song writer of his era for finally making it into the Smithsonian–long overdue in this Analyst’s opinion. Eddie is surely a national treasure.

Reminder: The World Didn’t End

February 18, 2011 Leave a comment

Remember when stress tests were all the rage and we felt the world economic order was hanging on the results of such things? I do, it was the spring of 2009—not so long ago. Back then, this headline would have incited mass consternation at best, and mild panic at worst.

Fed Tells U.S. Banks to Test Capital Against Recession Scenario

Nowadays, it’s barely worth a shrug. We’re over it. “Systemic failure”, that ubiquitous catchphrase of the last couple years barely gets a shrug any longer. Now, I know what you’re thinking: “Here comes the didactic tirade about how we’re about to repeat the same mistakes as just a couple years ago.”

Nope, the opposite. This is to remind folks that not only did the world not end in 2008, but actually much of the system proved much stronger than many believed (the economic and capital markets recovery simply couldn’t have happened so strongly and for this long were it otherwise), and that much of the doomsday talk never materialized. It’s vogue to want to hold folks accountable (Why Isn’t Anyone From Wall Street in Jail?) for the bear market, but why not call out the folks who kept investors out of the now ~100% run up in stocks since the bottom?

I’m being facetious, of course. But only a little. The world didn’t end; it wasn’t different this time.

Bears Are Cornered into Secular Talk

February 16, 2011 Leave a comment

You should never believe in the concept of “secular” Bear or Bull markets (the idea that there are +20 year super cycles for stocks). There just aren’t enough data points to be significant, and even if there were it’s folly because if you get just one of these so-called secular cycles wrong, you basically have ruined any chance of achieving your investing goals. Better to take it one year at a time—markets don’t price in the expected future much more than a few years at the most anyway.

But it is telling when others start evoking the secular argument. This generally happens when things aren’t going certain forecasters’ way. So, global stocks are about 100% higher than their nadir in March 2009, and that has the heels-dug-in bears saying this has all merely(!) been a secular bear market. Hogwash.

This isn’t just a bearish sort of thing. Back in 2000, when the market was beginning to roll over, you can find many a perma-bull saying it was a bull market correction. Nope. 2000 to 02 was a full fledged bear, and 2003 to 2007 was a period that saw new all-time highs in stock prices—I call that a bull market.

Ignore the secular theorists. I suggest to take it one year at a time instead.


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